CBS And Viacom: How To Play The Merger
Summary
- CBS and Viacom are working on a merger deal.
- The idea of this merger is to create competitive scale in a world where content is becoming more expensive.
- It probably is best for most investors to wait on the sidelines, or to hold (if one is already invested), until the merger occurs.
- The key element here is the post-merger strategy - that will tell the tale of this situation's potential as an investment.
It seems that it is finally going to happen. CBS (CBS) (CBS.A) and Viacom (NASDAQ:VIA-OLD) (NASDAQ:VIAB) will merge. When it exactly will happen is unclear to me, as is what the detailed value of the transaction will be to both sides.
Traders are obviously active participants as well as those who already own the stocks of either one or both companies. If you own the shares, it's probably best to hold (especially on the Viacom side, as that company is fighting for more value).
But if you are not directly involved in the stocks at the moment, my personal opinion is to wait until after the merger to decide what to do with the new company (unless there is some particularly compelling price action that almost obligates a trade).
What I want to do here, in brief, is think about what a CBS-Viacom merger means for the companies, and the industry. I want to consider how it will affect other business models, such as Disney (DIS), Lions Gate Entertainment (LGF.A) (LGF.B), or Netflix (NFLX), in a competitive fashion.
Literally, the first thing I thought of when approaching this situation is the conflict among management. Viacom and CBS has had many issues with the controlling Redstone family. CBS CEO Leslie Moonves, who has delivered many hits over at the storied broadcaster, has made his intentions clear - he will be the leader of the combined company, or it's no deal.
Shari Redstone, in my opinion, seems to be caught in the middle... her father Sumner Redstone is unfortunately probably not involved in any of the negotiations because of his age/health, and Viacom's CEO, Bob Bakish, is resisting selling to CBS for what he believes to be a price that does not exist in parity with the potential value of his side's assets - Paramount, various cable channels, and so on. In fact, to me, it almost seems as if Shari Redstone is intimidated by the whole process.
The following article, however, contradicts my opinion to some degree. The Hollywood Reporter implies that Redstone might, in fact, be open to the idea of not bringing Moonves aboard a newly-merged media concern. The article serves as a great summary, giving context and background information that actually gets to the central dogma of the possible merger: At the moment, the big point does not revolve around projections of cash flows and cost synergies so much as it orbits a vicious battle of planet-sized personalities worried about their respective legacies in Hollywood.
To be certain, one can trade all around that chaos but I'm more concerned with what happens once the merger occurs (I believe it eventually will be consummated), and let me be clear: I think, as impressive as he has been, that Les Moonves cannot be part of the CBS/Viacom equation if the two are to add up to anything substantially competitive in the new digital age of streaming, stacking rights and aversion to ad-supported, multichannel video programmers. CBS/Viacom without Moonves most certainly is more of a buy to me than the alternative scenario.
There is a checklist one should have in mind during the assessment of the investment value of CBS/Viacom as a post-merged entity; for me, it would be the following:
- New leadership at the top (i.e., Moonves/Bakish out).
- A plan for scaling up via acquisitions.
- Generation of a focused strategy for streaming (CBS Access, Showtime).
- A willingness to spend on content to counteract Netflix (NFLX).
All of these items are straightforward. One may take some exception to the first point - Moonves has steered CBS into a strong position via content such as The Big Bang Theory, and Bakish should perhaps be given a fairer hearing since he still is putting together a new paradigm for Paramount/etc. All of that could well be true, but optimally, the board could canvas for an outsider well-versed in the industry to come in with new ideas and a new attitude that could propel shareholder value.
Or, experienced vets with old ideas that remain relevant might also work - the name I like to bring into such a discussion is Thomas Staggs, former executive at Disney (DIS). One would assume someone like him would be eager to out-Iger Bob Iger in the franchise-building business, given he was unceremoniously passed over in the Mouse's plan for succession. The main issue is that Moonves might be too disruptive a force given the friction that seems to exist with Redstone; that couldn't be good for shareholders.
The second point, acquisitions, will certainly come up with the board since CBS coming together with Viacom isn't necessarily all it's cracked up to be; if it was five years ago, sure, I could see it. Nevertheless, CBS/Viacom probably need to be together considering what's happening in the industry.
But playing catchup is a precarious game, and make no mistake, Redstone is going to have to play catchup, even after she eventually navigates the executive politics and breathes a sigh of relief after coming up with some currently unknown solution in the near future - in other words, solving the Moonves problem is only the first step in solving National Amusements' dilemma (as support for this line of thinking, the linked Reporter article also states that "CBS and Viacom still will have more dealmaking to do if it is to survive").
The market, and the industry - including talent, agents and managers - aren't going to sit back and applaud the corporate nuptials just for its own sake. They all will want to know where the next batch of scale will hail from. CBS, it is well known, is making further strides in the movie business in its own small-scale manner, something reminiscent to me of a mini-Lions Gate (LGF.A) (LGF.B) strategy... now that I've brought that name into this paragraph, could a merged CBS/Viacom solve many of its problems by merging with Lions Gate, which essentially means merging with Starz?
If CBS and Viacom brought its content exclusively to Starz, it would seem to represent an advantage. It might offer competition down the line against Netflix and the upcoming streaming products from Disney, especially if the hypothetical CBS/VIA/Starz combo were to start spending like crazy to give Netflix's negative cash flow a run for its lacking money. This is just one of the many scenarios for which investors/traders must plan. (Reminder - this is just imaginative speculation on my part for purposes of illustrating a future possibility; still, it would not surprise me if something like that came to pass.)
CBS and Viacom own a valuable collection of assets that can be turned into growth vehicles for the long term. Management squabbles, however, and the whole Redstone-family chaos over the years, does add some risk. The best thing to happen would be for the post-merged company to find new leadership at the top. This is the main thing to watch for as it concerns the post-merged stock, and to determine whether or not it is a buy.
That ultimately translates to a strategy of not starting any positions now, in my opinion, and to make a new assessment later on. Moonves, however, may still remain in the mix (although that possibility may perhaps be growing smaller); that wouldn't necessarily make the stock a sell, but it would necessitate some very careful further consideration.
This article was written by
Analyst’s Disclosure: I am/we are long DIS, LGF.A, LGF.B, NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (16)
I think the deal is close to being consummated.
I guess now I doubt VIAB shares will be converted for .68 (or higher) shares of CBS and that .55 seems more likely. The "rapid accretion" would be nice.
At this point I would like to see W. Buffet or even G. Soros swoop in and buy up the entire shebang and fire all of them.May luck C. Icahn will come calling with yet another greenmail extortion.
CBS
Market Capitalization: $19 billion
Enterprise Value (EV): $28.9 billion
Long term Debt: $10.1 billion
Debt-to-Equity Ratio: 5.14
Interest Coverage Ratio: 5.44VIAB
Market Capitalization: $12 billion
Enterprise Value (EV): $22.4 billion
Long term Debt: $10.1 billion
Debt-to-Equity Ratio: 1.56
Interest Coverage Ratio: 4.22For CBS debt is rising, while for VIAB debt is fallingAnd while the numbers look good now, how will they hold up when the U. S. economy enters a recession in 2019 or 2020 as the flattening yield curve suggets?The Fed seems to be signaling no great urge to raise interest rates. If that is really the case, it would be the 11th hour for CBS-VIAB to refinance at low rates and pay down debt.I would rather see an aggressive debt pay down plan vs. an aggressive share buyback plan. But I figure I am in the smallest of minorities.
